Linda Calnan is the senior investment officer at Houston Firefighters' Relief and Retirement Fund and manages the pension’s private equity and real estate portfolios. Previously, Calnan was director of investments of Starling International Management Ltd. based in the United Arab Emirates.
She has served on the board of the Institutional Limited Partners Association (ILPA) as its Education Chairperson responsible for the design and curricula stewardship of the ILPA Institute which was launched under her leadership. She continues to serve the ILPA as a member of its Industry Affairs Committee. Calnan is a Valedictorian of the University of Miami, where she earned her MBA and a Summa Cum Laude of Sam Houston State University, where she earned her BBA in economics and international business.
Ms. Calnan was recently named on Trusted Insight’s ranked list of Top 30 LPs Investing In Private Equity. She graciously spoke with us on September 9, 2016. The following interview has been edited for clarity.
Trusted Insight: On a high level, how would you describe your investment philosophy?
Linda Calnan: I think the first element is portfolio design. I believe that you must understand your asset classes and set realistic expectations alongside resource and strength/weakness limits. Secondly, effective and efficient processes and disciplines must be adopted to facilitate learning, decision making, and controls. And lastly, simplicity is valuable. This may not sound like an “investment” philosophy, but that is what it is. If you are looking at a more traditional answer, I would consider myself a value investor.
Trusted Insight: your portfolio's ten-year private equity return is very impressive. It ranked the 4th in the nation. What did you do right?
Linda Calnan: I think it's a number of things. Firstly, I was fortunate enough to inherit a set of very successful managers. 13 years ago I was building from a fairly good base. And, I also had the support of our CIO and investment committee. This allowed me to escape some of the distractions and noise that can clutter portfolio design. We also created processes and disciplines around diligence, authority and portfolio management. And, we built the portfolio in a very strategic fashion. We weren't only seeking best-in-class managers, but were also building and designing a portfolio.
Speaking to specifics, I’d say that the role that private equity plays in our broader portfolio allowed us to design a portfolio that has performed a well as it has. In our case, we built an opportunistic private equity portfolio. So, senior credit and other strategies with lower return expectations do not have a significant role in the private equity portfolio. The expected rewards and portfolio characteristics of the excluded strategies were available via other asset classes.
With performance expectations set, we built the private equity portfolio along lines of risk mitigation. Commitment targets are formulated alongside cash flow, portfolio maturity, dry powder and strategy expectations. We target the lower end of our private equity allocation range giving us breathing room should the broader portfolio experience a denominator effect. Diversification has been created in regard to broad strategy, fund size, capital/leverage expectations, vintage year and to a lesser, extent manager selection.
And certainly, manager selection is critically important.
Trusted Insight: What do you look for when selecting asset managers?
Linda Calnan: Even after we believe we have portfolio and strategy/opportunity fit right and have found a manager capable of performing well, our process after that point is fairly extensive. As could be expected, we must make assessments in regard to expected performance and risk. Persistent performance is a tough one in private equity and so we spend a lot of time looking not only at who/what drove performance, but what are the risks/threats to the organization, team, partnership economics etc. that could mean that expected performance is missed. Too, we are looking for an organization that demonstrates cohesion and sound governance across the team, the organization, process vis-à-vis strategy, its relationship with limited partners, its relationship with regulators and other third-parties and in the partnership documents. While we believe these factors will lend themselves well to a good partnership, we are ultimately looking for great partners that treat us as such.
Trusted Insight: How long is the average fund life?
Linda Calnan: It's extremely varied. We have relationships that have been active and a core part of the portfolio for over twenty years. Others have been considerably shorter… one fund-and-done. While we strive to find and maintain long-term relationships, the re-up decision is extremely significant.
Trusted Insight: 2015 was a pretty difficult year for Houston Firefighters’ pension, as well as for other pensions. Where do you see the future holds for public pensions’ private equity investments?
Linda Calnan: That is a loaded question. I’ll address the asset class itself rather than the range of private equity related issues pensions currently face.
A number of investors question the inability of private equity to continue to outperform as it has historically. I think that's a legitimate concern. When you look at medium returns, that's already happening. I think that speaks to expected returns across all asset classes. That said, I believe that while the median return will continue to retrench, perhaps the laws of supply-and-demand and illiquidity premiums will allow the asset class to outperform on a relative basis. I also think our concerns speak to the significant amount of capital and number of managers that now occupy what was once a very inefficient and talent-centric investment space. But, in this regard I do believe there will continue to be managers that outperform their private equity peers and the dispersion between top and median funds will continue. At issue will be a pension plan’s (or any other investor’s) ability to navigate the ranks (and issues) of top performing managers.
Trusted Insight: Before joining Houston Firefighters' pension in 2003, you were director of investments at Starling International Management. What initially attracted you to the world of pension funds investing?
Linda Calnan: Quite frankly, I joined the Houston Fire Fighters Relief and Retirement Fund as a result of my desire to be in the Houston area. The firefighters’ pension was one of the few portfolios in Houston of considerable size that did not have an in-house dedicated private equity practitioner or a consultant at the time. It was really just luck. I was very fortunate.
Trusted Insight: You've been with the fund for 13 years. How has the private equity portfolio changed over time?
Linda Calnan: As you can imagine, after 13 years, the private equity portfolio has changed significantly. For the most part, these changes are the result of portfolio design considerations. And while our diligence and manager selection process has also changed, portfolio changes have been driven by the development of broader strategy and return/risk management.
Trusted Insight: Within your private equity investments, how much was invested in U.S. funds and how much was overseas?
Linda Calnan: Our private equity portfolio is predominantly USA-centric. While we have global managers, we currently do not have country or region-specific managers other than USA/North-American managers. Due to a number of considerations, not the least of which is the US/Global opportunity set, portfolio size and team size; It's hard for us to say: “we're going to take a bet on Europe” or “we're going to take a bet on Italy” in a way that would not then stretch portfolio construction and other strategy and resource considerations.
Trusted Insight: What career advice would you give to the younger generations who want to enter institutional investment?
Linda Calnan: I think it's education, hard work and relationships. If you're going to be successful, it's going to be as a consequence of these three factors.
Trusted Insight: Can you elaborate on the relationship part? Is it finding a good team, looking for mentors, for example?
I think it's got to be both of those and more. If you find a great team, that’s wonderful. But it is about the relationships. For example, do you have a mentor relationship with your boss? Do you have a teamwork relationship with others? Do you have the ability to grow from those relationships and also add to them positively? It also means that you develop relationships with GPs, managers, service providers. If you're still a student, it means have you developed a good relationship with your professors? Those skills are important and transferable to the workplace.
To learn more about private equity investing, click here to view the complete list of Top 30 LPs Investing In Private Equity.